Employer Excise Taxes Under Health Care Reform

Ann Caresani January 29, 2013 — 1,811 views

Contraceptive Coverage Mandate, New Proposed Regulations and HHS Due Process and Privacy Report Deadline Was 1/1/13

As you may have heard, the U.S Supreme Court denied Hobby Lobby an injunction against the PPACA contraceptive coverage mandate. Employers who maintain health care plans are required to pay excise taxes for failure to comply with a particular aspect of the law, regardless of whether coverage is affordable. As we previously explained, these nondeductible taxes are computed per affected individual, per day, and they may be substantial. Hobby Lobby will purportedly accrue taxes of $1.3 million per day if it continues to maintain its plan, but fails to provide the mandated coverage.

On December 28, the IRS issued a 144-page notice of proposed rulemaking and notice of public hearing on shared responsibility for employers regarding health coverage. This notice applies to a different set of nondeductible excise taxes. The notice is a lot to absorb, but so far we can see that it leaves open a lot of questions about tax timing, logistics, privacy and due process, which will apparently be addressed by the Secretary of Health and Human Services (HHS) in regulations and other guidance.

PPACA required HHS to issue a due process and privacy report by January 1, 2013. This report is needed to resolve statutory weaknesses regarding the excise taxes that could lead to new constitutional challenges if not resolved. Specifically, Section 1411(i) of PPACA requires the Secretary of HHS to consult with the Secretary of Treasury, study administration of employer responsibility, and provide a report to Congress by January 1, 2013 that addresses the procedures and/or legislative changes necessary to:

protect the rights of employees to confidentially of taxpayer return information and right to enroll in an exchange health plan if the employer does not provide affordable coverage; while

protect an employer's right to adequate due process and access to information necessary to accurately determine any shared responsibility penalty assessed on applicable large employers, commencing in 2014.

As we explained in a prior blog, the determination of these excises taxes cannot be verified until after individuals file their personal tax returns, and a substantial amount of information is collected and analyzed. While an employee may receive a premium credit in January 2014, whether that employee was actually eligible for that credit and whether the employer is actually liable for a penalty will not be determinable until perhaps mid to late 2015. Accordingly, there could be a two-year gap between when an employer is notified that an employee has received a credit, and when it has the information required to respond to an assertion that it owes a penalty. PPACA does not give employers the mechanisms to gather necessary information to determine penalties, and in fact prohibits the employer from obtaining much of this information, which leads to the due process concerns.

Others have discussed the breadth of information required, explained that the federal government is gearing up to collect all this information, and expressed concern about the privacy risks (theft/fraud) associated with this centralized data collection.

We have not seen an announcement about this HHS due process and privacy report yet, which could mean that it has been delayed beyond the January 1, 2013 deadline, or that it is has been overshadowed by fiscal cliff activity. But we will be interested to see how these issues will be resolved, and when employers will have to begin paying the new excise taxes.